If a dividend is reinvested to acquire more shares, how is it taxed?

When a dividend is reinvested to acquire more shares, it is considered taxable income in the year it is received, even though the investor chooses to reinvest it instead of taking it as cash. This means that the dividend is taxed as ordinary income in the year it is declared, regardless of whether or not the dividends are actually received in cash or used to purchase additional shares.

It's important to recognize that reinvesting dividends does increase the number of shares owned, which could potentially lead to capital gains in the future when those shares are sold. However, that capital gain taxation would apply only at the time of the sale of the shares, not at the time of the reinvestment of dividends. Thus, the correct treatment of reinvested dividends is that they are classified and taxed as ordinary income.